Everyone knows the story of the Titanic.
On April 15, 1912, the Olympic ocean liner deemed "unsinkable" sank off the coast of Newfoundland after striking an iceberg, causing more than 1,500 passengers and crewmen to perish.
The reason we are still talking about this maritime disaster more than 100 years after it occurred is two-fold.
First, the story was documented in a dramatic fashion in Leonardo DiCaprio's breakout film. Second, the incident provides a great example of the misalignment of incentives.
We all make decisions based off of incentives. Incentives are circumstances that cause an individual to make a decision which confers the greatest payoff to themselves.
The captain of the Titanic, Edward Smith, decided to cut through icy northern waters in order to reduce the time of the voyage. He responded to the pressures the White Star Line placed on him so the Titanic would live up to its hype. In essence, Smith placed more value on the timeliness of the voyage than on the safety of his ship and the people aboard.
This matters to students at UT because in the Titanic disaster, we find a microcosm for the incentives that drive the decisions made by elected officials. A better understanding of this process highlights the inherent tension between political and economic incentives, and thereby leads us down the road where solutions become a reality.
Whether it's intervention in the market to address externalities, or "experimentation" to see if there exists a better means of addressing economic shortcomings, the economic decisions that affect us all are subject to the whimsy of elected officials.
Franklin Delano Roosevelt is perhaps the most successful politician in American History. He was elected to the presidency an unprecedented four times and is still regarded by many as one of our greatest leaders.
Our friend Thomas Sowell – the Hoover institute economist – elaborates:
"During (FDR's) career and for decades thereafter, many saw his policies responsible for getting the country out of the Great Depression. However, with the passing years and additional research and analysis, more and more economists and historians have seen his policies as needlessly prolonging the depression by generating a pervasive uncertainty as to what the government was going to do next, leaving both investors and consumers hesitating to part with their money."
Under the assumption that FDR's policies prolong the Great Depression, as an ever-increasing chorus of scholars attest, we find ourselves in the midst of the economic-political dichotomy. In other words, decisions that are best for the politician are not always best for the economy.
This is the crux of my greatest qualm with government today. We need principled politicians who respond to economic incentives rather than basing their actions and decisions on what is politically best for them.
Unfortunately, the primary concern of many of our elected officials is maintaining power via reelection. Rather than standing up and saying to constituents that action and intervention in the market is not justifiable because governmental measures cannot address the problem effectively and efficiently, too many instead respond with knee-jerk reactions and spur intervention for political gain.
Continuing on historic market fluctuations Peter Temin, professor at MIT, notes:
"The stock market has (fluctuated) many times since (1929) without producing a similar movement in income. The most obvious parallel was the fall of 1987 ... The stock market fell almost exactly the same amount on almost exactly the same dates."
President Reagan took the exact approach of President Hoover and President Roosevelt – Reagan opted to follow in the footsteps of Calvin Coolidge and allow the economy to recover on its own.
Interestingly enough, the New York Times and the Washington Post belittled him as a "do-nothing" and charged him with "squandering an opportunity" for intervention.
Harvard economist Gregory Mankiw intones about the main question all too often on the minds of our elected officials: What should they be doing now to keep the economy on track? The right answer: absolutely nothing.
As I have enumerated in the past, I believe that some market intervention is necessary. Markets failures do exist, but the degree of government intervention is frequently too severe.
We need more Calvin Coolidges at the helm of the economy, rather than leaders like Capt. Smith of the Titanic. Until then, we will not have solutions that fix these failures; instead we will continue to be saddled with policies that deepen recessions and prolong the pain.
Adam Prosise is a senior in economics. He can be reached at email@example.com.